Organizations evaluate their financial health using a variety of values. Earnings per share are one metric to assess a company’s financial health and stock value. You can improve your financial knowledge and analyze the financial health of businesses by knowing what this measurement is and how to calculate it. In this article, we define earnings per share, explain how to calculate it, and look at how it can aid in your decision-making when it comes to investments.
Earnings Per Share: What is this?
Earnings per share (EPS) measures the share of a company’s net income that shareholders would get if all of the company’s shares were distributed to shareholders. EPS provides a wealth of information about a company, including information on its current and projected profitability. The fundamental financial data you may access online, as well as internal data from a firm or other organization, can be used to compute EPS.
How to determine a share’s earnings
A basic earnings-per-share equation or a weighted earnings-per-share equation can be used to determine EPS. Following are the procedures to use the fundamental equation to determine earnings per share:
1. Ascertain the business’s net profit for the previous year
The simplest method for calculating EPS is to use a company’s net income or earnings as the key metric. Usually, a company’s website or a finance webpage will have this information. Make sure you don’t confuse the company’s quarterly net income with its annual net income.
2. Quantify the number of outstanding shares
The number of shares that a corporation has outstanding on the stock exchange. Public websites that host financial information are where you can find this information. If you work directly with a corporation, you can also look up this information on its website or internal databases.
3. Calculate the net income by the total number of outstanding shares
Divide the total annual net income of the previous year by the total number of outstanding shares to get the basic earnings per share. The shares a corporation has previously issued to investors are known as outstanding shares. Standard stock and restricted stock units are among them.
EX: The company’s 2019 net income was $5 billion, and they currently have 1 billion shares outstanding.
- (5 billion divided by 1 billion) is the basic earnings per share.
- Standard EPS = 5
Weighted earnings per share calculation
Because it takes into account the dividends, also known as preferred stocks, that a firm issue to its shareholders, weighted earnings per share is a more accurate computation of EPS. A dividend is the sum of money that a business distributes to its shareholders out of its profits, typically on a quarterly basis. Here’s how to figure it out:
1. Calculate the company’s preferred stock distributions
This information is accessible on a company website or a financial webpage, just like other types of information. You can have access to the information as part of your job if you work for the corporation as an employee or contractor. If you’re an investor, you can get access to the data by speaking with the company’s leaders.
2. Subtract the dividends paid by the business from its yearly net income
Throughout the year, businesses distribute dividends to their shareholders. As a result of being a liability rather than an asset to the organization, the dividends aren’t included in the organization’s annual net income. You deduct the dividends from the income to account for this.
3. Subtract the difference from the average number of shares outstanding
Shares of a corporation that are still in the possession of investors are referred to as outstanding shares. Combinations of share blocks and restricted stocks are possible. Similar to the basic computation of earnings per share, the annual net income before dividends are reduced by the number of shares.
EX: In 2019, the company’s net income was $15 billion. It has 4 billion outstanding shares and distributes a $2 billion dividend to stockholders annually.
- Earnings per share weighted at (15 billion – 2 billion) / 4 billion
- EPS weighted = 13 billion / 4 billion.
- EPS weighted = 3.25
How to interpret earnings per share results
For you as an investor, EPS is significant since it indicates a company’s profitability, success, and worth. Here are some guidelines for deciphering EPS results:
A larger payout results from a higher EPS
A corporation that has a higher EPS number is more profitable and able to pay out more money to its shareholders. It’s significant to remember that there is no set limit on how many shares of a firm can be purchased or sold. It is advised to continually contrast a company’s EPS with that of similar businesses.
Utilize EPS to compare businesses
By comparing the EPS of businesses in the same industry, you can evaluate how one firm performs in comparison to others, which can help you make more informed investment decisions. When choosing an investment, keep in mind additional considerations like:
- Share value
- amount of dividends
- Market capitalization is another name for the price at which a firm is traded on a stock exchange.
- Liquidity, or the ease with which a corporation can transform its assets into cash
Trends in EPS growth can be used to predict future profitability
An investment in a company with a steadily rising EPS is more secure than one in a company with a fluctuating or dropping EPS. You may track a company’s performance over time to make wise investment selections by doing a per-share analysis of it. For instance, a business with consistent earnings per share (EPS) is more stable than one with large EPS spikes and decreases.
To estimate stock value, use EPS
You can tell if a company’s stock price is reasonable by looking at its price-earning ratio. EPS provides the earnings data required for the price-earnings comparison. You may assess whether a company is pricey or appropriately valued in comparison to other companies in its industry by dividing the share price by the earnings per share.
Hopefully, with the above information that we provide, you have answered the question “How to compute earnings per share” Thank you for following this article. See more useful information on our website